SPECIAL TRADE COMMISSION manufacturing in this country include investing in skills and training, investing in infrastructure and improving planning regulation. The sectors most exposed to additional cost and risk from the introduction of tariffs and customs procedures should be identified, and work should be done to establish what the additional costs of customs compliance will be and where they will fall. 12.6 A period of adjustment may be required for customs authorities to ensure systems and resources are in place, businesses can comply with formalities and for manufacturers to comply with RoO. IT systems, facilities at customs borders and human resources will all need to be implemented and tested. Traders may wish to make changes to their supply chains depending on the RoO that are agreed and this, together with the certification process, will take time after the agreed RoO are known. Therefore an interim period after the Exit Date should be considered during which both sides will waive customs checks and rules of origin, provided the UK maintains the Common External Tariff for rest of world imports (so the UK does not become a back door for tariff free trade into the EU). Further research is recommended to establish how long such adjustment period should last, and whether it needs to apply to all goods. 12.7 UK operators who trade with the EU should ensure they register for EORIs and, if appropriate, apply to be AEOs. Mutual recognition of such registrations should be included in the Withdrawal Agreement. Comprehensive customs cooperation and recognition of conformity assessment bodies should continue to minimise at-border activity. 12.8 Mutual recognition of conformity assessment bodies should be sought as a priority. If necessary, the UK could undertake to retain exiting harmonised legislation for products like medicines and motor vehicles for an interim period. A commitment from both sides to mutual recognition and trade facilitation should be sought at the outset of negotiations to reduce uncertainty for businesses. 12.9 The UK should maintain its membership of European standards bodies (at least for an interim period) and continue to participate in global fora such as UNECE and Codes Alimentarius in order to continue to have a role in the regulations to which imports of goods to the EU will be subject. 32 |

SPECIAL TRADE COMMISSION APPENDIX 1 THE WTO LEGALITY OF A DUTY-FREE REGIME FOR IMPORTS OF COMPONENT PRODUCTS USED IN EXPORTED FINAL PRODUCTS by Lorand Bartels. 16 December 2016 A. THE ISSUE This memorandum considers the legality, under WTO law, of a UK measure granting duty free treatment for a component product (for example, a car part) that is imported from a third country (for example. Korea) for use in the production of a ‘final product’ (for example, a car) in the UK which is exported to the EU27 following the UK’s departure from the EU. B. A UNILATERAL DUTY FREE REGIME 1. There is no legal obstacle to the UK granting duty free treatment to any imported product, including a component product, provided that it grants the same duty free treatment to all ‘like’ component products imported into the UK from all other WTO Members. This follows from the most favoured nation obligation in Article I:1 ofthe GATT 1994, a non-discrimination provision. Article I:1 states as follows: In connection with importation or exportation … any advantage, favour, privilege or immunity granted by any Member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other Members. 71 2. Article I:1 applies to measures that discriminate against ‘like’ products both de jure (i.e. when the measure is formally discriminatory by specifying different treatment according to the origin ofthe products at issue) and de facto (i.e. when the measure is formally neutral as to origin but as a matter of fact discriminates against products according to origin). This was clarified by the WTO Appellate Body in Canada—Automobiles. This dispute concerned a Canadian measure implementing the Canada-United States ‘Auto Pact’ Agreement (originally dating from 1965), which consisted of a duty exemption for motor vehicles produced by certain manufacturers. The duty exemption was only available for manufacturers that controlled production facilities and were able to meet certain conditions concerning production in those facilities. Canada argued that Article I:1 did not prohibit the imposition of ‘origin-neutral terms and conditions on importation that apply to companies as opposed to the products they import.’ 72 The Appellate Body rejected this argument. 73 3. This means that the UK may not grant duty free treatment to a component product used in a particular supply chain unless it grants the same treatment to all ‘like’ component products. C. DUTY FREE TREATMENT AS A SUBSIDY 4. In Canada—Automobiles, the Appellate Body also determined that the exemption of duties for imports of some but not all automobiles constituted ‘government revenue that is otherwise due [that] is foregone or not collected’ within the meaning of Article 1.1(a)(1) (ii) ofthe Agreement on Subsidies and Countervailing Measures (SCM Agreement). 74 That meant that the duty exemption constituted a ‘financial contribution’. Because the duty exemption also conferred a ‘benefit’, it was a subsidy within the meaning of Article 1.1 ofthe SCM Agreement. | 33